At an FDA-regulated manufacturing plant, which process items — water-treatment, HVAC, boiler, pigging, RF guns, antifoam, labels, printers — are exempt as industrial machinery, and which are taxable?

Plain-English summary

A manufacturer in an FDA-regulated industry runs a Tennessee plant that makes a consumer product for resale. The FDA forces it to use a long list of process equipment and supplies, and the company asked the Department which of those purchases are exempt from Tennessee sales and use tax as "industrial machinery." The Department went item by item.

The exemption (Tenn. Code Ann. § 67-6-206(a)) applies only to a manufacturer — a business whose principal activity (more than 50% of its revenue at a location) is fabricating or processing tangible personal property for resale (§ 67-6-206(b)(2)). This plant qualifies. "Industrial machinery" is then defined as equipment that is "necessary to, and primarily for" the fabrication or processing of products for resale (§ 67-6-102(44)(A)(i)). The Department applied a three-part test: (1) is it machinery/apparatus/equipment; (2) is it necessary ("absolutely needed" — the process couldn't function without it); and (3) is it used primarily (more than 50%) in manufacturing. The definition also expressly reaches machines that generate, produce, and distribute steam and treated or untreated water (§ 67-6-102(44)(D)(i)) and "pollution control facilities" (§ 67-6-102(44)(A)(ii)).

How each item came out:

• Water Treatment System — EXEMPT. It produces FDA-required pharmaceutical-grade water; even though only ~2% goes into the product itself, the rest is used to clean equipment/piping and for sanitization (both essential), so it qualifies under both the steam/treated-water clause and the general definition.
• Boiler System — EXEMPT. It generates steam (≈75% used in production — heating batch kettles, the HVAC, and cleaning/sterilization water).
• HVAC System — EXEMPT. 88% of its use maintains the FDA-required processing/packaging environment and mitigates microcontamination; the plant couldn't operate without it.
• Pigging System — EXEMPT. It pushes the product from the making-area piping to the filling line; without it the product couldn't be put into tubes for sale.
• RF Guns — EXEMPT. ~70% of use is FDA-required tracking of materials during the manufacturing process.
• Antifoam Treatment — EXEMPT as a pollution control facility. It removes foam the plant creates before water is discharged to the municipal treatment facility (untreated water would be offensive to the public and draw utility fines).
• Labels — SPLIT. Labels that accompany the pallets of finished product shipped to retailers are exempt as packaging (§ 67-6-329(a)(13)). Labels used to track raw materials and in-process goods are not packaging and are generally taxable, unless they come into direct contact with the product (and are consumed within 25 days, Rule 1320-5-1-.40).
• Printers — TAXABLE. They print the tracking labels, but the printing happens outside the manufacturing process and is "one step removed" from packaging; they have only a secondary, indirect role, so they are neither necessary to nor primarily for fabrication (like the storage tanks denied the exemption in Woods v. General Oils).

Throughout, the Department stressed that exemptions are construed against the taxpayer, who bears the burden of proof, and any well-founded doubt defeats the exemption — which is why the printers, on doubt, stayed taxable.

What this means for you

Manufacturers buying plant equipment and supplies

Tennessee's industrial-machinery exemption is broad but item-specific: it reaches not just core production machines but also utility-type systems (steam boilers, treated-water systems) and pollution-control facilities, as long as each is necessary to and primarily (more than 50%) used in your manufacturing. FDA or other regulatory mandates help show an item is "necessary," but you still have to show the primarily-used-in-manufacturing threshold. Items that merely support the business indirectly — like printers that make tracking labels — typically don't qualify.

Watch the packaging-vs-tracking line on labels and supplies

Labels and similar materials that go out with the finished product (packaging) can be exempt under § 67-6-329(a)(13), but materials used to track inventory or in-process goods generally are not — unless they make direct contact with the product. Map each consumable to the right rule rather than treating "all labels" the same.

Accountants and tax professionals

The framework: manufacturer status (§ 67-6-206(b)(2); Tenn. Farmers' Coop.; Beare Co.), then the three-part necessary/primarily test of § 67-6-102(44)(A)(i) ("primarily" = >50% use, Woods; "machinery/equipment" broadly, Tibbals), plus the (44)(D)(i) utilities/steam/treated-water clause and the (44)(A)(ii) pollution-control-facilities clause. Packaging is its own exemption (§ 67-6-329(a)(13); Rule 1320-5-1-.40). Expect strict construction against the taxpayer and the well-founded-doubt rule (Am. Airlines; Rogers Group; United Canners).

Common questions

Q: What has to be true for plant equipment to be exempt "industrial machinery" in Tennessee?
A: The buyer must be a manufacturer (principal business is fabricating/processing for resale), and the item must be machinery/apparatus/equipment that is necessary to and used primarily (more than 50%) for that fabrication or processing (Tenn. Code Ann. § 67-6-206(a); § 67-6-102(44)(A)(i)).

Q: Do water and steam systems qualify?
A: They can. The definition expressly includes machines used to generate, produce, and distribute steam and treated or untreated water (§ 67-6-102(44)(D)(i)) — here both the boiler and the pharmaceutical-grade water system were exempt because they were essential to and primarily used in production.

Q: Why were the printers taxable when so much else was exempt?
A: The printers only printed labels outside the production process and were "one step removed" from packaging — a secondary, indirect role. That isn't "necessary to and primarily for" manufacturing, and with the taxpayer bearing the burden, the doubt defeated the exemption.

Q: Are labels taxable?
A: It depends on use. Labels that accompany the finished product to the retailer are exempt as packaging (§ 67-6-329(a)(13)); labels used to track raw or in-process goods are generally taxable unless they directly contact the product.

Q: Can I rely on this letter ruling?
A: No. A Tennessee letter ruling binds the Department only as to the specific taxpayer and facts and can be revoked or modified. Confirm your own purchases with a tax professional.

Citations and references

Tennessee statutes and rules (Tenn. Code Ann.; Retailers' Sales Tax Act, §§ 67-6-101 to -907):

• § 67-6-206(a) (industrial-machinery exemption); § 67-6-206(b)(2) (manufacturer = principal business fabricating/processing for resale)
• § 67-6-102(44)(A)(i) (definition of "industrial machinery" — necessary to and primarily for fabrication/processing for resale); § 67-6-102(44)(A)(ii) ("pollution control facilities"); § 67-6-102(44)(D)(i) (machines generating/producing/distributing utilities, steam, treated or untreated water)
• § 67-6-329(a)(13) (packaging-materials exemption, including labels); Tenn. Comp. R. & Regs. 1320-5-1-.40 (direct-contact, consumed-within-25-days materials)
• § 67-6-102(76) (definition of "retail sale"); § 67-6-102(78)(A) (definition of "sale")

Tennessee cases cited by the ruling:

• Tenn. Farmers' Coop. v. State ex rel. Jackson, 736 S.W.2d 87 (Tenn. 1987); Beare Co. v. Tenn. Dep't of Revenue, 858 S.W.2d 906 (Tenn. 1993) (manufacturer / >50%-of-revenue test)
• Tibbals Flooring Co. v. Huddleston, 891 S.W.2d 196 (Tenn. 1994); Tibbals Flooring Co. v. Olsen, 698 S.W.2d 60 (Tenn. 1985) (meaning of "machinery"/"equipment"; threshold analysis)
• Woods v. Gen. Oils, Inc., 558 S.W.2d 433 (Tenn. 1977) ("primarily" = >50% use; equipment with only a secondary/indirect use is not exempt)
• Eastman Chem. Co. v. Johnson, 151 S.W.3d 503 (Tenn. 2004); Int'l Playing Card & Label Co. v. Chumley, 2005 WL 3287939 (Tenn. Ct. App. 2005); Misenheimer Saw & Tool, Inc. v. Huddleston, 1994 WL 652155 (Tenn. Ct. App. 1994) (necessary/integral; >50% manufacturing test)
• Am. Airlines, Inc. v. Johnson, 56 S.W.3d 502 (Tenn. Ct. App. 2000); Rogers Grp., Inc. v. Huddleston, 900 S.W.2d 34 (Tenn. Ct. App. 1995); United Canners, Inc. v. King, 696 S.W.2d 525 (Tenn. 1985) (exemptions strictly construed against the taxpayer; well-founded doubt defeats the exemption)

Source

• Landing page: https://www.tn.gov/revenue/tax-resources/legal-resources/tax-rulings.html
• Original PDF: https://www.tn.gov/content/dam/tn/revenue/documents/rulings/sales/13-10.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 13-10
Letter rulings are binding on the Department only with respect to the individual taxpayer
being addressed in the ruling. This ruling is based on the particular facts and
circumstances presented, and is an interpretation of the law at a specific point in time. The
law may have changed since this ruling was issued, possibly rendering it obsolete. The
presentation of this ruling in a redacted form is provided solely for informational purposes,
and is not intended as a statement of Departmental policy. Taxpayers should consult with a
tax professional before relying on any aspect of this ruling.
SUBJECT
The applicability of the Tennessee sales and use tax industrial machinery exemption to various
equipment and supplies.
SCOPE
This letter ruling is an interpretation and application of the tax law as it relates to a specific set of
existing facts furnished to the Department by the taxpayer. The rulings herein are binding upon
the Department, and are applicable only to the individual taxpayer being addressed.
This letter ruling may be revoked or modified by the Commissioner at any time. Such revocation
or modification shall be effective retroactively unless the following conditions are met, in which
case the revocation shall be prospective only:
(A) The taxpayer must not have misstated or omitted material facts involved in
the transaction;
(B) Facts that develop later must not be materially different from the facts upon
which the ruling was based;
(C) The applicable law must not have been changed or amended;
(D) The ruling must have been issued originally with respect to a prospective or
proposed transaction; and
(E) The taxpayer directly involved must have acted in good faith in relying upon
the ruling; and a retroactive revocation of the ruling must inure to the taxpayer’s
detriment.

1

FACTS
[TAXPAYER] (the “Taxpayer”) has a [PRODUCT] manufacturing facility located in [CITY],
Tennessee. The Food and Drug Administration (the “FDA”) regulates the Taxpayer’s industry.
As part of such regulation, the FDA requires the Taxpayer to use certain process equipment and
supplies (the “Process Equipment and Supplies”), which include the following:
Water Treatment System
The Water Treatment System is one complete system used to convert water used at the facility to
pharmaceutical grade water, as required by the FDA. The incoming raw water is treated by
chlorine injection, pH adjustment, and filtration pretreatment methods. The objective of this
pretreatment is to produce water that is suitable for use by the primary treatment sub-system.
Additional equipment is needed for the primary water treatment method, water softening, reverse
osmosis, and continuous deionization. Two types of water are produced: [REDACTED] Feed
water and [REDACTED] Purified water.
After pretreatment and primary treatment, the [REDACTED] Purified water is further posttreated by a sanitizing ultraviolet unit and a [REDACTED] bacteria retention filter and is heated
to [TEMPERATURE]. The hot water is then placed in a hot [REDACTED] Purified water tank.
Hot [REDACTED] Purified water is then distributed to points of use in the facility by means of a
recirculating piping and distribution system, which is designed to allow the maximum water
withdrawal rate of 100 gallons per minute and is limited to two or three points of use at any
single time. The hot [REDACTED] Purified water is delivered to various points of use via the
water distribution pump and is used primarily in equipment and piping cleaning and in the
sanitization final rinse step. However, approximately two percent of the [REDACTED] Purified
water is used as an ingredient in the [PRODUCT] manufactured by the Taxpayer.
A second product water, [REDACTED] Feed water, is produced by applying a water softening
treatment and heating the water to a minimum [TEMPERATURE]. The hot water is stored in a
heated [REDACTED] Feed water tank. Hot [REDACTED] Feed water is then distributed to
points of use in the facility by means of a recirculating piping and distribution system, which is
designed to allow a maximum water withdrawal rate of 40 gallons per minute and is limited to
one point of use at any single time. The hot [REDACTED] Feed water is delivered to various
points of use via the water distribution pump and is used only in equipment and piping cleaning
and in the sanitization initial rinse step.
Antifoam Treatment
The Antifoam Treatment, which prevents foaming, is used to treat the water before it is
discharged to the local municipal water treatment facility. If the water is not treated, the local
utility could fine the Taxpayer.
HVAC System
The HVAC System is made up of nine separate units used to maintain specified environments
required by the FDA. Eighty eight percent (88%) of the system’s usage is to support the
production process by maintaining the environment in processing and packaging. The cool
2

environment created by the HVAC system is needed to help mitigate micro contamination in the
production process.
Boiler System
The Boiler System consists of two separate units that produce the steam for the process heating.
Almost seventy five percent (75%) of the steam produced is used to heat three batch kettles used
in the production of the product. The remainder of the steam is used to heat water used in the
process of cleaning the equipment and treated water used for cleaning and sanitization, and a
very small percentage of the steam is used in warehouse space heaters and reheat coils in the
HVAC system.
Pigging System
The Pigging System is used to push the remaining [PRODUCT] from the making area piping
where the [PRODUCT] is manufactured to the filling line piping where the [PRODUCT] is put
into the [PRODUCT] tube. After the tube is filled, it is placed in a carton, which is ready for the
retailer’s shelf.
RF Guns
The RF guns are used to track and record transfers of the materials as required by the FDA.
Approximately seventy percent (70%) of an RF gun’s usage occurs during the manufacturing
process. An RF gun is also used to track the raw materials in storage before the process and the
finished goods in warehousing before shipment.
Printers
The printers are used to print the tracking labels. The majority of the labels printed are applied to
the finished goods pallets; however, tracking labels also are placed on raw materials.
Labels
The majority of the tracking labels are applied to the finished goods pallet before it is shipped to
the Taxpayer’s distribution center, while a small number of the labels are placed on the raw
materials upon arrival and are also used throughout production. The palletizing of the products is
part of the Taxpayer’s manufacturing process. The labels attached to the pallets of product
accompany the pallets when shipped to the retailers.
RULING
Are the Taxpayer’s purchases of the Process Equipment and Supplies subject to the Tennessee
sales and use tax?
Ruling: The Taxpayer’s purchases of the Water Treatment System, HVAC System,
Boiler System, Pigging System, RF Guns, and Antifoam Treatment are exempt from the
Tennessee sales and use tax as industrial machinery.

3

Labels that accompany the pallets of product sold to the retailers are exempt from the
Tennessee sales and use tax as packaging. Labels used to track the raw goods prior to the
manufacturing process and the products during the manufacturing process, however, are
generally subject to the Tennessee sales and use tax.
The printers are subject to the Tennessee sales and use tax.
ANALYSIS
The following table lists the Process Equipment and Supplies purchased by the Taxpayer to
comply with FDA regulations, states whether a particular item is exempt, and references an
enumerated explanation as to the item’s taxability. The enumerated explanations appear after the
table.
Item

Exempt from the Sales and Use Tax
[WHEN PURCHASED BY TAXPAYER]

Explanation

Water Treatment System

Yes

2

HVAC System

Yes

1

Boiler System

Yes

2

Pigging System

Yes

1

RF Guns

Yes

1

Anti Foam Treatment

Yes

3

Labels

Yes, in most cases.

4

Printers

No

5

Explanations
Under the Retailers’ Sales Tax Act, TENN. CODE ANN. §§ 67-6-101 to -907 (2011), the retail sale
of tangible personal property is generally subject to the Tennessee sales and use tax.1 However,
1

TENN. CODE ANN. § 67-6-102(76) (Supp. 2012) defines a “retail sale” as any “sale, lease, or rental for any purpose
other than for resale, sublease, or subrent.” The term “sale” is defined under the Tennessee sales and use tax laws in
pertinent part as “any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or
otherwise, in any manner or by any means whatsoever of tangible personal property for a consideration.” TENN.
CODE ANN. § 67-6-102(78)(A).
4

TENN. CODE ANN. § 67-6-206(a) (Supp. 2012) exempts “industrial machinery” from the sales
and use tax, providing that “[a]fter June 30, 1983, no tax is due with respect to industrial
machinery.”
In order for an item to qualify as exempt industrial machinery, the Taxpayer must qualify as a
manufacturer. A manufacturer, for purposes of the industrial machinery exemption, is “one who
engages in . . . fabrication or processing as one’s principal business.” 2 Manufacturing is a
taxpayer’s principal business if more than fifty percent of its revenues at a given location are
derived from fabricating or processing tangible personal property for resale. 3
The Taxpayer has indicated that its business is operating a manufacturing facility in [CITY],
Tennessee, and the function of the facility is the manufacturing of [PRODUCT] for resale and
consumption off the premises. Thus, it follows that more than fifty percent of the Taxpayer’s
revenues at that location derives from fabricating or processing tangible personal property for
resale. The Taxpayer, therefore, is a manufacturer for purposes of the industrial machinery
exemption provided in TENN. CODE ANN. § 67-6-206(a).
The term “industrial machinery” is generally defined in pertinent part 4 as
[m]achinery, apparatus and equipment with all associated parts,
appurtenances and accessories, including hydraulic fluids, lubricating
oils, and greases necessary for operation and maintenance, repair parts
and any necessary repair or taxable installation labor therefor, that is
necessary to, and primarily for, the fabrication or processing of tangible
personal property for resale and consumption off the premises . . .
where the use of such machinery, equipment or facilities is by one who
engages in such fabrication or processing as one’s principal business. 5
The term “industrial machinery” includes “[m]achines used for generating, producing, and
distributing utility services, electricity, steam, and treated or untreated water.” 6 The definition of
industrial machinery also includes “pollution control facilities,” which is defined in pertinent part
as
any system, method, improvement, structure, device or appliance
appurtenant thereto used or intended for the primary purpose of
eliminating, preventing or reducing air or water pollution . . . when
such pollutants are created as a result of fabricating or processing by
2

TENN. CODE ANN. § 67-6-102(44)(A)(i); cf. TENN. CODE ANN. § 67-6-206(b)(2) (Supp. 2012).

3

Tenn. Farmers’ Coop. v. State ex rel. Jackson, 736 S.W.2d 87, 91-92 (Tenn. 1987); see also Beare Co. v. Tenn.
Dep’t of Revenue, 858 S.W.2d 906, 908 (Tenn. 1993).

4

Note that the definition of “industrial machinery” is extensive. This letter ruling will discuss only those portions of
the definition that are applicable in the context of the [PRODUCT] manufacturing facility.

5

TENN. CODE ANN. § 67-6-102(44)(A)(i).

6

TENN. CODE ANN. § 67-6-102(44)(D)(i).
5

one who engages in fabricating or processing as such person’s principal
business activity, which, if released without such treatment,
pretreatment, modification or disposal, might be harmful, detrimental
or offensive to the public and the public interest. 7

1. Machinery, Apparatus, and Equipment
   As stated above, TENN. CODE ANN. § 67-6-102(44)(A)(i) defines “industrial machinery” in
   pertinent part as “machinery, apparatus and equipment . . . that is necessary to, and primarily for,
   the fabrication or processing of tangible personal property for resale and consumption off the
   premises.”
   An item of tangible personal property, therefore, will be exempt from the Tennessee sales and
   use tax as industrial machinery if the following requirements are met: 1) the item is properly
   considered machinery, apparatus, or equipment; 2) the item is necessary to the fabrication or
   processing of the products sold by the Taxpayer; and 3) the item is used primarily for the
   fabrication of the products sold by the Taxpayer.
   The HVAC System, Pigging System, and RF guns clearly meet the broad definitions of
   “machinery” or “equipment.” 8 However, every piece of machinery, apparatus, equipment that a
   manufacturer uses is not necessarily exempt from the sales and use tax. To qualify for the
   industrial machinery exemption, a system must be necessary to and used primarily for the
   manufacturing process.
   The facts indicate that the HVAC System, Pigging System, and RF Guns meet the second
   requirement for exemption from the sales and use tax as industrial machinery as they are
   necessary to the fabricating or processing the products sold by the Taxpayer. The proper test is
   whether the object in question is necessary to the production process as engaged in by the
   taxpayer. The term “necessary” is not defined by the Tennessee Code Annotated or the
   Tennessee courts for Tennessee sales and use tax purposes. Nevertheless, a common definition
   of the term “necessary” is “absolutely needed; required.” 9 Thus, in order for a piece of
   machinery, equipment, or apparatus to be “necessary” to the manufacturing process, it must be
   absolutely needed for that process to work. Stated conversely, for the machinery, equipment, or
   apparatus to be considered “necessary,” the manufacturing process must not be able to function
   in the item’s absence.

7

TENN. CODE ANN. § 67-6-102(44)(A)(ii).

8

See Tibbals Flooring Company v. Huddleston, 891 S.W.2d 196, 198-99 (Tenn. 1994). In this case the Tennessee
Supreme Court stated that “the word ‘machinery’ means ‘machines as a functioning unit;’ and ‘equipment’ is ‘the
physical resources serving to equip a person [such as] the implements (as machinery or tools) used in an operation or
activity ... all the fixed assets other than land and buildings of a business enterprise.’” Id (citing Tibbals Flooring
Company v. Olsen, 698 S.W.2d 60, 62 (Tenn. 1985); quoting WEBSTER’S THIRD NEW INTERNATIONAL DICTIONARY
(1976)).
9

MERRIAM-WEBSTER’S COLLEGIATE DICTIONARY 828 (11th ed. 2007).

6

The HVAC System is a necessary part of the Taxpayer’s manner of producing its products. The
six units that are part of the system maintain FDA requirements for packaging and processing by
creating an environment with proper ventilation, temperature, and filtration. The system
mitigates microcontamination in the production process, and the facility could not operate safely
without the environment that the HVAC system creates.
The Pigging System is a necessary part of the Taxpayer’s fabrication and processing system
because it pushes the [PRODUCT] to the piping where it is inserted into tubes, and without the
Pigging System, the [PRODUCT] and the tubes would remain separate and distinct items
incapable of resale. The RF Guns are a necessary component of the Taxpayer’s manufacturing
process because they track and record the product throughout the manufacturing process as
required by the FDA, and the facility could not operate without use of the RF Guns.
The HVAC System, Pigging System, and RF Guns meet the third requirement to qualify as
exempt industrial machinery because they are primarily used in the manufacture of the
Taxpayer’s products. The Tennessee Supreme Court, in applying the industrial machinery
exemption, found that the term “primarily” means “first of all; principally; or fundamentally.”10
The court also noted that the term has been held to mean “first in rank or importance, chief,
principal, basic or fundamental.” 11 The machinery, equipment, or apparatus satisfies the
requirement that it be “primarily for” the fabrication of the taxpayer’s products if more than fifty
percent of its use is in the manufacturing operation. 12
The HVAC System operates primarily for the fabrication of the Taxpayer’s products. To ensure
the integrity of the product, the FDA requires that such a system be in place for the Taxpayer to
operate its facility and manufacture of its products. The Taxpayer states that eighty-eight percent
(88%) of the system’s usage is support the production process by maintaining the proper
environment for processing and packaging its products. Thus, its direct and primary purpose is
for the fabrication of the Taxpayer’s products.
The Pigging System’s only function is to push the product from one piping system to another in
the facility, and thus meets the third requirement. Seventy percent (70%) of usage of the RF guns
occurs to track the transfer of materials during the manufacturing process. Thus, their use is
primarily for the fabrication of the Taxpayer’s product. Accordingly, the HVAC System, Pigging
System, and RF Guns independently meet the definition of industrial machinery under TENN.
CODE ANN. § 67-6-102(44)(A)(i).

10

Woods v. Gen. Oils, Inc., 558 S.W.2d 433, 436 (Tenn. 1977) (citing WEBSTER’S THIRD NEW INTERNATIONAL
DICTIONARY (1961)).
11

Id. (citing Breen v. Indus. Accident Bd., 436 P.2d 701 (Mont. 1968); 20th Century Mfg. Co. v. United States, 444
F.2d 1109 (Ct. Cl. 1971)).
12

Cf. Tenn. Farmers’ Coop, 736 S.W.2d at 91-92; Misenheimer Saw & Tool, Inc. v. Huddleston, No. 03A01-9406CH-00226, 1994 WL 652155, at *5 (Tenn. Ct. App. Nov. 21, 1994) (stating that the appropriate test is whether more
than 50% of a business’s gross sales receipts result from manufacturing).
7

2. Machines For Generating, Producing, and Distributing Steam, and Treated or Untreated
Water
The Water Treatment System and the Boiler System come within the scope of the industrial
machinery exemption under TENN. CODE ANN. § 67-6-102(44)(D)(i), which provides that
industrial machinery that is necessary to and primarily for the manufacturing process includes
“[m]achines used for generating, producing, and distributing . . . steam and treated or untreated
water.” The Tennessee Supreme Court, in analyzing this subsection, has stated that “the
threshold question is whether the property is ‘machinery, apparatus or equipment, with all
associated parts, appurtenances, and accessories.’” 13
By their operation, the Water Treatment System and the Boiler System generate steam and
produce treated water. Nonetheless, an analysis under TENN. CODE ANN. § 67-6-102(44)(A)(i) is
also necessary pursuant to Tibbals. 14 The Water Treatment System and the Boiler System meet
the first requirement of TENN. CODE ANN. § 67-6-102(44)(A)(i) because each system fits within
the definitions of “machinery” or “equipment.” 15
The Water Treatment System and the Boiler System also meet the second requirement of TENN.
CODE ANN. § 67-6-102(44)(A)(i) that the item be necessary to the fabrication or processing of
the products sold by the Taxpayer. With regard to the Water Treatment System, the FDA
requires conversion of water at the facility to pharmaceutical grade water. Although only a small
amount of the water produced is used as an ingredient in the [PRODUCT] manufactured by the
Taxpayer, the remaining water produced is delivered throughout the facility and used to clean
equipment and piping and in sanitization, both of which are vital to the operation of the plant.
The Water Treatment System is an appurtenance necessary for the operation of the machinery
and equipment that produce the Taxpayer’s product. It is also an integral part of the
manufacturing process, and the Taxpayer could not produce a sellable product without it. 16 As
such, the operation of the Water Treatment System is necessary to the fabrication of Taxpayer’s
products.
The Boiler System creates the steam that heats the batch kettles used in the manufacturing
process, creates the steam for the HVAC System, and creates the steam used to heat water used
in cleaning and sterilization. Such steam is essential to the fabrication of the Taxpayer’s end
product. Thus, the Boiler System is necessary to the fabrication of the Taxpayer’s products.
Finally, the Water Treatment System and the Boiler System meet the third requirement of TENN.
CODE ANN. § 67-6-102(44)(A)(i) that the item be primarily for the fabrication of the products
sold by the Taxpayer. With regard to the Water Treatment System, although the Taxpayer only
uses two percent (2%) of the [REDACTED] Purified Water processed by the Water Treatment
13

Tibbals, 891 S.W.2d at 198-200.

14

See supra note 8.

15

See id. at 198-99.

16

See Eastman Chem. Co. v. Johnson, 151 S.W.3d 503, 510 (Tenn. 2004); Int’l Playing Card & Label Co., Inc. v.
Chumley, No. E2005-00581-COA-R3-CV, 2005 WL 3287939, at *6 (Tenn. Ct. App. Dec. 5, 2005).
8

System as an ingredient in the [PRODUCT] that it manufactures, it uses all of the remaining
[REDACTED] Purified Water as well as all of the [REDACTED] Feed Water produced in
cleaning equipment and pipes as well as in its sanitization initial rinse step. Such cleaning and
sanitization are vital parts of the manufacturing process, and the FDA requires the use of these
types of pharmaceutical grade water in the Taxpayer’s facility. Because the Water Treatment
System is essential for the manufacturing process and all of the water processed by the system is
used in the manufacturing operation, the system functions primarily for the fabrication of the
Taxpayer’s product.
The Taxpayer uses the Boiler System primarily in the production process because it creates the
steam for the HVAC and also heats the batch kettles used in the manufacturing process. The
Taxpayer states that almost seventy five percent (75%) of the steam that the Boiler System
produces is used in the manufacturing operation. As such, the Boiler System is fundamental to
the manufacturing process.
Thus, the Water Treatment System and the Boiler System, respectively in place to treat water
and produce steam, meet the threshold definition of industrial machinery and are properly
exempt under TENN. CODE ANN. § 67-6-102(44)(D)(i).

3. Pollution Control Facilities
   The definition of “industrial machinery” includes pollution control facilities. “Pollution control
   facilities” is defined in pertinent part as “any system, method, improvement, structure, device or
   appliance appurtenant thereto used or intended for the primary purpose of eliminating,
   preventing or reducing air or water pollution . . . when such pollutants are created as a result of
   fabricating or processing by one who engages in fabricating or processing as such person’s
   principal business activity, which, if released without such treatment, pretreatment, modification
   or disposal, might be harmful, detrimental or offensive to the public and the public interest.” 17
   The Antifoam Treatment is exempt from the Tennessee sales and use tax under TENN. CODE
   ANN. § 67-6-206(a) as a pollution control facility. The Taxpayer applies the Antifoam Treatment
   to the water used in production as a system or method to eliminate foam that the Taxpayer
   creates during its manufacturing process before it discharges the water to the local municipal
   water treatment facility. Without the Antifoam Treatment, the water used in production would be
   offensive to the public. Moreover, the local water utility service would fine the Taxpayer if it did
   not apply the Antifoam Treatment.
4. Packaging
   The labels that accompany pallets of product sold to the retailers are exempt from the Tennessee
   sales and use tax as packaging materials. TENN. CODE ANN. § 67-6-329(a)(13) provides an
   exemption for materials used in packaging a product, including labels, when such packaging
   accompanies the product when sold directly to the consumer or is incidental to the sale of the

17

TENN. CODE ANN. § 67-6-102(44)(A)(ii).

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product for resale. Further, materials that come in direct contact with the product and are
consumed within twenty-five days also are exempt. 18
The majority of the labels that the Taxpayer uses are attached to the pallets shipped to the
retailers. These labels are merely incidental to the sale of the products to the retailer and, thus,
exempt from the Tennessee sales and use tax. The labels used to track the raw goods prior to the
manufacturing process and the products during the manufacturing process, however, are not
packaging materials and are subject to the Tennessee sales and use tax unless they come in direct
contact with the product.

5. Taxable Items
   The printers fail to qualify for exemption from the Tennessee sales and use tax under TENN.
   CODE ANN. § 67-6-206(a) as industrial machinery. As discussed above, an item of tangible
   personal property will be exempt from the Tennessee sales and use tax as industrial machinery if
   it is properly considered “machinery, apparatus and equipment with all associated parts,
   appurtenances and accessories” that is “necessary to, and primarily for, the fabrication or
   processing” of the products sold by the taxpayer. 19
   In the Taxpayer’s case, the printers are neither necessary to nor primarily for the fabrication of
   the Taxpayer’s products. Rather, such items have only a secondary or indirect use with respect to
   the manufacturing process. The printers print the labels that accompany the product when sold to
   retailers. While the labels may be applied during the manufacturing process, the printing occurs
   outside of that process and is not essential to the manufacturing. Further, machinery used to
   apply the labels to the pallets may be exempt as machinery used to package the product, but the
   printers are one step removed from this process and do not perform the actual packaging of the
   product.
   In applying the definition of “primarily” in the context of the industrial machinery exemption,
   the Tennessee Supreme Court denied the industrial machinery exemption to an oil processing
   company, holding that tanks used to store oil awaiting processing had “at most, only a secondary
   and indirect use” in the manufacturing process. 20 Applying this definition to the Taxpayer’s
   printers, the printers’ principal function is to print information for tracking applied to finished
   goods pallets. While this function is important, as with the tanks in Woods, the function,
   nonetheless, is only secondary or indirect with respect to the manufacturing process.
   The burden is on the taxpayer to establish entitlement to an exemption from taxation. The
   Tennessee Supreme Court has stated that “[a]lthough the rule is well-established that taxing
   legislation should be liberally construed in favor of the taxpayer and strictly construed against
   the taxing authority, it is an equally important principle of Tennessee tax law that ‘exemptions
   18

TENN. COMP. R. & REG. 1320-5-1-.40 (1974).

19

TENN. CODE ANN. § 67-6-102(44)(A)(i).

20

Woods, 558 S.W.2d at 436.

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from taxation are construed against the taxpayer who must shoulder the heavy and exacting
burden of proving the exemption.’” 21 The Tennessee Supreme Court has also stated that the
burden is on the taxpayer to establish the exemption, and any well-founded doubt is sufficient to
defeat a claimed exemption from taxation. 22
With respect to printers, sufficient doubt exists so as to defeat the application of the industrial
machinery exemption to such items.

Jennifer Wilson
Assistant General Counsel
APPROVED:

Richard H. Roberts
Commissioner of Revenue

DATE:

08/27/2013

21

Am. Airlines, Inc. v. Johnson, 56 S.W.3d 502, 506 (Tenn. Ct. App. 2000) (quoting Rogers Grp., Inc. v.
Huddleston, 900 S.W.2d 34, 36 (Tenn. Ct. App. 1995)).
22

Id. (citing Tibbals, 891 S.W.2d at 198; United Canners, Inc. v. King, 696 S.W.2d 525, 527 (Tenn. 1985)).

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